An LLC, or limited liability company, restricts the liability of the business owner to her interest in the business. In other words, someone can’t sue the company and end up taking the owner’s house, car and other assets. Though an LLC is a very popular business structure, you may choose a different structure for your business, such as a sole proprietorship, a simple partnership or a corporation. The form you choose depends on the nature of your business and your tax situation.

Sole Proprietorship

A sole proprietorship is the simplest business structure, one often used for small businesses. You own the business, and while you may have employees, you probably don’t have many. You may operate out of your home. You report the income you earn from your business on Schedule C, “Profit or Loss From Business,” of your personal income tax form. You don’t have to file any special legal paperwork to form a sole proprietorship. In some locations, you won’t even need a special license, especially if your business name is the same as your name; other locations require you to file a DBA, or “Doing Business As,” form to register the name of your business. As a sole proprietor, you are personally responsible for all the debts and obligations of your business.

Partnership

If you form a business with one or more partners, you may choose to set up your business as a partnership. A partnership may or may not be an LLC. In a simple partnership that is not an LLC, each partner holds a specified interest in the business and shares in the profits and expenses of the businesses. A partnership files an information return with the Internal Revenue Service, showing expenses and income, and each partner receives a Form K-1, showing his share of the income. The partners each report their share of the business income on their personal income tax return. As a partner, you’re liable for all or part of the debts of your business. If you form a partnership, you should have a legal agreement that spells out each partner’s interest in the business. You need to register your partnership with your state or municipality.

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C Corporation

If you set up a C Corporation, or Subchapter C Corporation, you become not an owner of the business but a shareholder. You may hold 100 percent of the shares in the business, or you may have other shareholders who hold various percentages of the business. A corporation is a separate taxing entity. The corporation files a separate income tax return and pays taxes on corporate earnings. As a shareholder, you pay taxes on the dividends you receive from the corporation. You also may be an employee of your corporation, in which case you receive a paycheck from which taxes are withheld. As a shareholder, your liability for the corporation’s debts is limited. Corporations are more complex business structures and are more expensive to establish and maintain.

S Corporation

S Corporations are similar to C Corporations, but an S Corporation may treat taxes as a partnership situation, with the shareholders in the company reporting the corporate income on their individual tax returns. The S Corporation files a corporate tax return -- Form 2553, Election by a Small Business Corporation, which elects to have the shareholders report the corporate income on their individual tax returns. As with other corporate structures, shareholders’ liability is limited. Each state sets rules for establishing a corporation and the legal paperwork you must file to do so.

References

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About the Author

Cynthia Myers is the author of numerous novels and her nonfiction work has appeared in publications ranging from "Historic Traveler" to "Texas Highways" to "Medical Practice Management." She has a degree in economics from Sam Houston State University.